By Sandhya Srinivasan and Manu Sharma
Under the Paris Agreement, each country communicated its plan for climate action through Nationally Determined Contributions (NDCs). The NDCs represent voluntary commitments by countries to mitigate and adapt to climate change. Article 6.2 of the Paris Agreement recognizes that countries can participate in voluntary cooperation, including carbon markets, through a variety of bilateral and plurilateral approaches to achieve and enhance their climate goals. Mitigation Outcomes (MO) generated from low carbon projects can be sold internationally (whereupon they would become Internationally Transferred Mitigation Outcomes or ITMOs) to generate revenues for the project. Although the rules for operationalizing Article 6 are yet to be finalized through the international negotiations, there is growing interest in carbon markets.
ITMOs can be used by the buying country to demonstrate the achievement of their NDCs. While engaging in ITMO trades is voluntary, the Paris Agreement requires that Parties apply robust accounting to ensure that MOs that are traded are not double counted, i.e., by the buyer as well as the seller, toward their respective NDCs. Therefore, the selling country (i.e., the host country where the project is located) is required to make a “corresponding adjustment”. In other words, since the buying country may count the ITMO toward its NDC target, the host country must adjust its accounts to ensure that the ITMO is not also counted toward its NDC.
Article 6.3 of the Paris Agreement notes that the use of ITMOs to achieve NDCs is voluntary and authorized by participating Parties. Therefore, host countries would be expected to provide an authorization for the transfer of MOs. Through this authorization, which may be provided through a Host Country Agreement, the host country could explicitly commit to undertaking corresponding adjustment against the ITMO transfer.
A corresponding adjustment is essential for the buyer to use an ITMO to demonstrate the achievement of their NDC. Therefore, “delivery” of the ITMO is completed when evidence of corresponding adjustment is provided. If the host country is unable to provide evidence of such corresponding adjustment, the buyer may not be able to use the ITMO at all, leading to a loss equivalent to the money spent to purchase the ITMO.
It is likely that there will be a time lag between the purchase of MOs and the corresponding adjustment being undertaken. The evidence of corresponding adjustment can be verified through biennial transparency reports (BTR), which countries would submit every alternate year. This presents a potential regulatory risk for buyers of MOs since there is a timing mismatch between the ITMO being transacted and the host country delivering on its commitment to carry out a corresponding adjustment.